Should I open a roth IRA now?

Question

I'm 21, how much will I need to invest every year to reach multi-millionaire status by age 50?

Answer 1

The sooner you start, the better. It is tough to say exactly how much you want in order to be a multi millionare. If you want to have $2,000,000, then you would need to start saving $900 a month, to reach this goal by the time you are 50 (this also assumes an inflation rate of 3.1%, remember, $2,000,000 will buy less in 29 years than it does today). This also assumes a 12% rate of return (avg annual rate of return for the S&P 500 since 1929).

There is one problem with this situation, you can only contribute $5,000 a year into a roth IRA. You would also have to contribute to a work retirement savings plan (ie 401K, SIMPLE IRA) or into another savings vehicle, like a Variable Annuity, and/or a Variable Universal Life Insurance policy in order to reach (those vehicles carry higher fees, so you would need to add a bit more).

You may want to be more realistic with your savings goals. If you do contribute the maximum every year ($5,000, plus annual increases for inflation), you will have $2 million by the time you are 55. But remember that you will pay penalities on your money if you take your money out before age 59 1/2.

Also, the government can always change the rules on you. With the looming Social Security crisis, it would not surprise me if the government may one day begin to tax IRAs and other retirement accounts, as a way to support the people who did not prepare for their own retirement.

All of my figures assume that the stock market keeps on returning at its historical rates.

Answer 2

The sooner you open one, the better off you are, as you let the power of compounding work for you. Your money will double according to the Rule of 72 or the Rule of 76, depending on how you view it (take the current growth rate and divide it into 72 or 76; the result will tell you how many years it will take).

The Roth IRA has the benefit of using after-tax money (you can't take a deduction for the money you contribute) but the money grows and all monies received from it are tax-free (unlike a traditional, where the contributions are tax-deductible but the proceeds are taxable).

This year, you cannot contribute more than $4,000 to an IRA (either Roth or traditional, or a combination of the two). Next year, that limit goes to $5,000 if you're under 50. There are income limits (single can contribute up to the limit if you make $95K or less; contributions are limited if you make between $95 and $110K; cannot contribute over $110K; for joint filers, the limits are $150K and $160K).

If you can contribute the max, do so. If you invested $4000 this year and got a return rate of about 8% per year, at age 50 just that portion would be worth about $32,000. At age 70, it would go to about $128,000. And that's just one year's contributions. If you can't invest the max, any amount you can will be helpful, as every dollar invested today will be worth about $32 when you retire.

Answer 3

If you have a little something to put in that you don't need right now, go for it. But if you want to take the money out at 50, just read the fine print--the tax rules are geared toward poeple taking the money out at age 59.

Answer 4

Yes, you should open a roth today! The younger you do it the more money you will earn. Try to put the max in every year if you can.